Recovering pledged vehicles forcibly against the law

IN order to protect the interests of consumers in hire and purchase transactions, the Law Commission of India had proposed, over four decades ago, a specific law called the Hire Purchase Act. Subsequently, in 1972, the government brought in a law by that name but never enforced it. In fact the Hire Purchase Act of 1972 and the subsequent Hire Purchase (Amendment) Bill of 1989, which sought to protect people from unfair practices by financiers and also forcible and illegal repossession of goods, got buried forever. Why? Because financial institutions have a strong lobby and so they did not want such a law. 

In the absence of such a law, clients continue to be victims of unfair trade practices by financiers and bankers. In fact, the comments of the Law Commission made in its 168th report of March 1999 are relevant even today, despite the RBI guidelines on fair practices in credit transactions and on repossession of pledged goods for default in payments.  Commented the Law Commission in its report: “The need for a separate hire and purchase law to regulate hire and purchase transactions is undeniable. Such a law is essential to protect the buyer of the goods against certain abuses in the practice of hire and purchase trading.”

A recent case that came up before the national consumer disputes redressal commission is an example. In this case, the complainant, Birendra Kumar Sinha, purchased a Tata truck with a loan from IndusInd Bank in 2006. The loan was required to be paid in 48 EMIs of Rs 27,500 each. By July 2007, Sinha had paid Rs 1,23,000, but on the ground that some dues amounting to Rs 43,495 had not been paid, the vehicle was forcibly recovered from him, and when he asked for release of the vehicle, he was asked to pay the entire outstanding balance on the loan. The complainant invoked the jurisdiction of the district consumer disputes redressal forum, Dhanbad, which held the bank guilty of deficiency in service.

In its revision petition before the national consumer disputes redressal commission, the bank argued that repossession was in exercise of its right under Clause 15.2 of the loan agreement and, therefore, there was no deficiency on its part.

Disagreeing with this, the national commission pointed out that the question here was not about the right of the bank to repossess, but of the manner in which it was done. This was a case of forcible repossession of the financed vehicle and such forcible repossession was in clear violation of the law as laid down by the Supreme Court and the norms prescribed by the RBI.

The Supreme Court in the case of ICICI Bank Limited vs Prakash Kaur and others (2007) 2 SCC, 711) had said: “The bank should resort to the procedure recognised by law to take possession of vehicles in cases where the borrower may have committed default in payment of the instalments, instead of taking resort to strong-arm tactics.”

The national commission, too, in the case of Citicorp Maruti Finance Ltd vs S.Vijaylaxmi, had come down heavily on banks using force to repossess vehicles.

Quoting these two cases, the national commission dismissed the revision petition of the bank at the admission stage itself (IndusInd Bank Ltd vs Birendra Kumar Sinha, RP No 3703 of 2010, decided on February 2, 2011).

The Reserve Bank of India, in its master circular on “Loans and Advances — Statutory and other Restrictions,” specifies the procedure to be followed by financial institutions for recovery of hypothecated or pledged goods in case of non-payment of dues by the customers.

As per the circular, one of the first conditions for repossession of pledged goods is that the financier should give adequate notice to the borrower and follow due procedure and not resort to forcible repossession. The terms and conditions of the hire and purchase or loan contract should clearly specify the notice period before taking possession.

Similarly, the financier has to follow the due process of law for sale or auction of the goods or property. Most important, all these should be specified in the contract and explained to the borrower at the very beginning.

Yet, banks are known to violate these guidelines with impunity. The latest order of the national commission is a reminder to the banking regulator that it needs to enforce its guidelines stringently. The order should also make the government re-think on the need for a separate law to protect consumer interest in hire and purchase transactions.

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